Ethanol: corn, fuel savings and world hunger

In January, the Missouri Renewable Fuel Standard became law in the Show-Me state. The standard requires an E10 blend of gasoline (10 percent ethanol) when the price of ethanol is less than regular gasoline. Missouri is one of three states with such a fuel standard and the first to have such a pricing mechanism.

But is it really saving drivers money at the fuel pump? To find out, the Missouri Corn Merchandising Council recently commissioned a study by John Urbanchuk and LECG, an economic consulting service.

“The legislation developed by the opponents of the E10 mandate (was discussed). They’re seeking to have the mandate removed and they presented the picture from the perspective of the cattle industry.

“Those of us working on the side of the corn industry — and my client, of course, is the Missouri Corn Merchandising Council — pointed out that not just the corn sector, but all Missourians, benefit from E10 blended gasoline. Ethanol works to the benefit of all Missourians.”

On highlights from the study…

“We were asked to examine and analyze the impact of E10 on gasoline prices at the pump — that would be 90 percent gasoline and 10 percent ethanol. We used actual data for gasoline prices at various stages of distribution channels … and the retail price for 2007 and year-to-date for 2008 (through the end of March).

“Then, we made projections based on forecasts for gasoline and wholesale ethanol prices that were developed by the U.S. Department of Energy and published in the Energy Information Agency’s long-term U.S. energy outlook. Those numbers were first published in January and updated in March.

“What we found is that in 2007, when roughly 70 percent of the gasoline in Missouri was voluntarily blended with ethanol, the average savings was 7.7 cents per gallon.

“In 2008, we estimate the difference will be 9.8 cents. Obviously, oil and gasoline prices have skyrocketed. While ethanol prices have increased, they haven’t (risen like gasoline).”

So the numbers you cited in your testimony mean 2008 will be better for consumers?

“I’m confident in the 9.8 cents per gallon (prediction) as a consequence of using E10. And that’s a benefit for every Missouri driver. There are 3.9 million licensed drivers in the state. They’ll each end up saving about $73.”

When would ethanol become cost-prohibitive?

“The combination of factors that would render ethanol uneconomical would be if oil and gas prices fell while ethanol prices increased.

“Because what you’re looking at is 90 percent of the blend is gasoline. Keep in mind, the ethanol price was adjusted … There’s a 51 cent volumetric ethanol excise tax credit that the blender — the person who buys the ethanol from the producer — receives. Basically, that tax allows him to reduce his effective cost for ethanol.

“So, if you have a circumstance where gas prices fell and ethanol prices rose, ethanol may not be cost-effective. But I have a hard time seeing that circumstance occur. Oil prices continue to rise and gasoline is following.

“Ethanol prices are determined by a combination of gasoline — because it’s sold as an additive to gasoline — and ethanol production. While rising oil prices will also carry ethanol along, the ethanol price will be moderated by the fact that we’re producing more and more of it.

“I feel confident that over the next decade Missourians will save about 7.2 cents per gallon due to use of E10.”

With rising food prices are you having an increasingly hard time getting your message across?

“In many respects, these are two separate issues.

“What we’re doing is looking specifically at retail level gasoline prices and asking, ‘what is the impact of ethanol at the pump?’

“Looking at food prices, last month the CPI for food beverages was 4.7 percent above March of 2007. Total CPI was up a bit over 4 percent.

“So, food prices are accelerating faster than they have in the past several years. They aren’t anywhere near the rates of change we had back in the early and mid-1990s. And you could go back to the glory days of Jimmy Carter when we had double digit increases in prices.

“But food prices are beginning to rise. Why is that happening? Critics of biofuel say it’s because of the way corn is being used. Corn being used to make ethanol isn’t being put into the food system and, as a consequence, food prices are going up.

“The fallacy with that argument is when you make ethanol from corn, you don’t lose the full feed value. And keep in mind — and it astounds me that we must continue to remind people of this — that the corn we’re talking about is eaten by us in the form of a pork chop or chicken or a glass of milk. That corn represents one raw material, one ingredient — an important one, I admit — in the production of meat, milk and poultry. And it has some impact on other things like sweeteners. But it’s only one raw material.

“The price for energy, however, has a much greater impact on retail food prices than does the price of corn. To say that the only reason that food prices are increasing is due to ethanol is absolutely wrong and a ridiculous allegation, in my opinion.

“Is it having an impact? Is it a contributing factor? Yes but not, by any stretch of the imagination, the major factor or even a major factor.

More on the error of fusing food prices and ethanol…

“The other part of the situation involves the consumer retail food basket. Take a look at the products corn plays a direct role in as a cost of production: beef, pork, chicken, turkeys, and eggs. And let’s add milk in, too, although corn plays a tiny role in dairy costs.

“Looking at all that, you’ll find that those foods only account for about 30 percent of the food products in the average retail food basket.

“There’s a lot of stuff going on that impacts food prices. To lay the blame for food price increases at the feet of biofuels is wrong.

“Also, take a look at where food prices are increasing the fastest: cereal and bakery products. Those are made almost exclusively from wheat.

“We don’t make ethanol from wheat. There are a few people around the world who do. And wheat prices have been affected by things other than biofuels such as drought in Australia and other global production distortions.

“Some say, ‘We’re taking land out of wheat and putting it in corn.’ That isn’t true. The wheat acreage in the United States has increased for the last two years. And if you believe the USDA planting report from a couple of weeks ago, even more is being planted this year.

“As for the price increases in diary products and eggs, those are due to strong foreign demand. Our exports of those are up significantly and that’s driving prices up.

“It’s a complex issue and there’s a lot more to it than just ‘food prices are up because we’re making ethanol from corn.’”

However, that case is being aggressively made…

“You can’t pick up a newspaper almost anywhere in the world where food shortages and world hunger are being discussed and not find a reference to the use of corn for ethanol.

“The most significant crop being covered recently is rice. There are problems with the supply and access that has pushed up prices dramatically. There are countries that have put on export restrictions on rice and have regulations against hoarding.

“Well, none of that is due to the use of corn for ethanol. No one makes ethanol from rice. The problems with rice stem from production and distribution issues.

“But critics point to biofuels as a reason for the problems with the rice supply. And people often blindly accept that and say, ‘I guess that’s right.’

“It’s not. And corn is rarely planted on the same ground as rice. It’s rare there’s competition for land between those crops. Worldwide, rice is primarily a paddy crop. In Arkansas, Louisiana and Texas — where most U.S. rice is grown — rice land isn’t usually suitable for corn.”

On the different reactions from grain farmers and ranchers to his report…

“For example, one global problem is market speculation. There has been a tremendous surge of speculative money in the form of investment in commodity funds and the like. Those represent money coming out of the weak financial and housing sectors and going into hard assets and commodities like grains. That’s significantly raised prices.

“We may be looking at a circumstance where roughly a third of the price of corn is due to pressures being driven by the investors. That’s the commodity bubble.

“And I’ll tell you that, as with every other bubble, this one will burst and there will be a rationalization of prices.

“When I speak with farmers and ranchers in the poultry and livestock industries, they’re much more vociferous in their criticism of biofuels. The current situation is certainly driving up their cost of production and creating financial anxiety.

“Now, I’m looking at this from the side of the corn industry. We went through several years where corn prices were around $2 per bushel. At that time, the livestock and poultry industry weren’t complaining. They were more than happy to allow the taxpayer to subsidize corn through farm programs and payments because that helped keep their costs down. Now, the shoe is on the other foot and they’re justifiably concerned.”